Dear Momentum Options Subscriber,
The bears got their first weekly sweep in three weeks last Friday, as the major indices closed slightly lower. The damage was minimal, however, and the bulls held near-term support on the pullback, while volatility stayed relatively low.
This week’s action could get more exciting with the start of third-quarter earnings season, and analysts are expecting a 2% slip in overall earnings forecasts. This means that high-flying stocks will need to show growth to keep their lofty valuations, while struggling companies will need to stem losses to keep their share prices afloat.
The Dow fell 28 points, or 0.2%, to end at 18,240 on Friday. The blue-chips opened at 18,295 and traded up to 18,319. Resistance at 18,350-18,400 and the 50-day moving average held, and a close above the latter would be a bullish development. The pullback to 18,149 and the 100-day moving average split support at 18,200-18,100. These levels have held since mid-September, but there is risk to 18,000-17,800 on a close below the latter.
The S&P 500 slipped 7 points, or 0.3%, to settle at 2,153. The index made a run to 2,165 shortly after the open to push lower resistance at 2,165-2,170. I have talked about continued closes above 2,175 getting all-time highs back in play, and that level is currently 1% away. The fade to 2,144 also split support at 2,150-2,140. Continued closes below 2,135 and the 100-day moving average would be bearish.
The Nasdaq gave back 14 points, or 0.3%, to finish at 5,292. Tech made a slight attempt at resistance at 5,325-5,350, but the 9-point trip to 5,315 quickly faded. The mid-day low of 5,266 stretched support at 5,300-5,275, but these levels have held for six-straight sessions. A close below the latter could lead to a backtest to 5,250-5,200 and the 50-day moving average.
The Russell 2000 dropped 9 points, or 0.8%, to close at 1,236. The small-caps struggled from the start after managing a one-point pop to 1,247. Resistance at 1,250-1,260 easily held before the intraday flop to 1,231. Lower support at 1,240-1,235 was breached, with the 50-day moving average holding into the close. I have mentioned that there is risk to 1,225-1,220 on a close below the latter.
The S&P 500 Volatility Index ($VIX, 13.48, up 0.64) tested a low of 12.21 on the open to breach upper support at 12.50-11.50. The mid-day high of 14.15 failed to clear upper resistance at 14.50-15 and the 100-day moving average. A close above the latter could lead to 16.50-17.50 and the 200-day moving average. The close below 13.50 was slightly bullish, but it failed to hold the 50-day moving average.
Roughly 70% of S&P 500 companies beat second-quarter earnings estimates, with over 50% of the reporting companies topping revenue estimates. This has been an ongoing trend in recent years despite the cat-and-mouse game played with quarterly estimates by Wall Street analysts and corporate America.
Out of the S&P 500 members, nearly 15% issued negative earnings-per-share (EPS) guidance, while 18% issued a positive EPS forecast for the recently ended third quarter. I mentioned above that analysts have penciled in a 2% decline for the S&P 500 earnings outlook for period stretching from July through September.
This means that expectations are low, and high-profile earnings beats would be bullish clues that the quarter wasn’t as bad as some had feared. However, earnings misses by leading sector stocks could have a domino effect that could drag the market lower.
One of the interesting developments from last week, despite it being a down week, was the strength in the financial stocks. I talked about the sector needing to show some strength last week, and perhaps leadership in the weeks ahead, if the market is going to make another run to all-time highs.
The Financial Select Sector SPDR (XLF, $19.62, down $0.01) added roughly 2% last week after trading to a high of $19.66 on Thursday and Friday. The move above the 50-day moving average was a bullish sign, with fresh resistance at $19.75-$20. The 52-week high is at $20.28. Support has moved up to $19.50-$19.40.
I profiled the XLF November 19 calls (XLF161118C00019000, $0.90, flat) at $0.70 last Monday, and I had wanted to into them if shares cleared $19.50-$19.60 last week. At the time, I mentioned that these options would double if XLF shares clear $20.40, technically, by Nov. 18. At current levels, the new “double” price is for XLF shares to trade above $20.80. If shares reach $20.40 by then, the trade would make over 50% from current levels.
Brent Oil ($BRENT, $51.68, down $0.99) pulled back by 2% on Friday, but it easily cleared and held the $50 level throughout last week. Stabilizing oil prices could help market sentiment, and the technical outlook has turned bullish.
The 50-day moving average is back in an uptrend and is on track to clear the 100-day moving average to form a mini “golden cross.” Continued closes above $52.50-$53 could lead to a short-term run to $55 a barrel. Support is at $51.25-$50.
Shares of Exxon Mobil (XOM, $86.74, down $0.30) have traded in a tight range this month following the surge from $82 to $87 at the end of September. The company is expected to announce earnings on Oct. 28, and shares could rally ahead of the event on a move above $87.75-$88. A close above the latter and the 100-day moving average could lead to a run past $90. Support is at $86.
The XOM November 87.50 calls (XOM161118C00087500, $1.50, down $0.10) could be targeted by bullish traders if shares clear $87.75-$88 over the near term. These options have five weeks before expiration and would double from current levels, technically, if shares clear $90.50 by Nov. 18.
Although third-quarter earnings season officially starts this week, I don’t expect any major moves in the market until the following few weeks. The companies reporting this week will be significant, as they will provide some clues as to what we can expect, but the heart of earnings season is what I expect to give the bulls or bears the momentum.
The Dow has had trouble with Monday/Friday closes recently, as I discussed last week. The blue-chips have fallen on three-straight Mondays, and I would like to see that streak snapped today. If the bears do push lower lows to start the week, crucial levels of support will need to hold to keep the current month-long trading range intact.
I have several bullish and bearish trades on my radar for this week, including the options I profiled for XLF and XOM above. However, I want to see how this morning’s action plays out to see if we can get better clues as to market direction and how this week might unfold.
From desk to press, futures look like this: Dow (+68); S&P 500 (+9); Nasdaq 100 (+19); Russell (+7).
Momentum Options Play List
Closed Momentum Options Trades for 2016: 74-25 (75%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 8:00 a.m. EST.
I hereby disclose that I will be participating in the following trade(s).
Kroger (KR, $29.00, down $0.37)
KR November 27.50 puts (KR161118P00027500, $0.44, up $0.08)
Entry Price: $0.50 (10/4/2016)
Exit Target: $1.00
Stop Target: None
Action: Near-term support is at $29-$28.75. The recent 52-week low is at $28.71. Resistance is at $29.25-$29.50. All of the moving averages are still in major downtrends, and I still like this trade going forward.
Halozyme Therapeutics (HALO, $11.92, down $0.20)
HALO November 13 calls (HALO161118C00013000, $0.75, down $0.10)
Entry Price: $1.07 (9/27/2016)
Exit Target: $2.15
Stop Target: $0.55 (Stop Limit)
Action: Near-term support is at $11.75-$11.50. A close below the latter would be a bearish development, with risk to $11 and the 50-day moving average. Resistance is at $12-$12.25.
Shares have been stuck in a mini trading range following the golden cross that formed in mid-September. The 50-day moving average is still in a solid uptrend. The 100-day moving average is on track to clear the 200-day moving average over the near term, which would also form a mini golden cross.
Goodyear Tire & Rubber (GT, $32.83, down $0.03)
GT October 33 calls (GT161021C00033000, $0.61, down $0.07)
Entry Price: $0.75 (9/22/2016)
Exit Target: $1.50
Stop Target: $0.30 (Stop Limit)
Action: Support is at $32.75-$32.50. Resistance is at $33, but a close above this level would be a bullish development. A golden cross also formed late last month, signaling higher highs.
Viavi Solutions (VIAV, $7.25, down $0.13)
VIAV December 8 calls (VIAV161216C00008000, $0.22, flat)
Entry Price: $0.51 (8/19/2016)
Exit Target: $1.05
Stop Target: $0.15 (Stop Limit)
Action: Friday’s low reached $7.24. Support is at $7.25-$7.15 and the 100-day moving average. Resistance is at $7.45-$7.50 and the 50-day moving average. Earnings are due out the first week of November, and I will cover the expectations later this month.
Editor and Chief Options Strategist